Understanding  underwriting
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Understanding underwriting

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  • 1. Understanding Underwriting
  • 2. Rakesh, a music lover was aware that thestudents of the city were dying to see theRock Band, “Spark” perform in Mumbai.So he approached his friend, Rohit, aseasoned businessman with the idea ofhosting such an event. Rohit also felt thatthe idea was good and thought he couldmake a killing out of this.
  • 3. He decided to market the event. When herealized that the cost of marketing such anevent was huge, he started getting coldfeet.He started to think, “What if he did not geta full house? What if it started raining onthe day of the event?” He knew that only apacked house would become “news” thatwould help his reputation.
  • 4. Sensing that indecisiveness was finding itsway into Rohits mind, Rakesh went on anoverdrive to ensure that Rohit does notback out. Rakesh was convinced about thesuccess of the idea.He walked up to Rohit and proposed thathe would buy the unsold tickets, if therewould be any.
  • 5. That assurance was good enough for Rohitto make his decision to go all out andinvest the money in creating and marketingthe event.This assurance of purchasing the unsoldtickets is similar to what is popularly knownas “Underwriting”.
  • 6. In underwriting, in this context, a companyis trying to raise money from the market byissuing shares. The underwriter is theperson who helps the promoter inmarketing the issue so that it either getsoversubscribed or 100% subscribed.In case of a shortfall, the underwriterpurchases the outstanding shares.
  • 7. Hope this lesson has helped you in understanding the term Underwriting Please give us your feedback at professor@tataamc.com
  • 8. Disclaimer The views expressed in these lessons are for information purposes only and do not construe to be of any investment, legal or taxation advice. They are not indicative of future market trends, nor is Tata Asset Management Ltd. attempting to predict the same. Reprinting any part of this presentation will be at your own risk and Tata Asset Management Ltd. will not be liable for the consequences of any such action.Mutual Fund investments are subject to market risks, read all schemerelated documents carefully.